A new industry code to help you shop around for the best annuity is a positive move, but I think more radical action must be taken. What would it take for you to pick the best annuity when you cash in your pension?
The last few years have been a tough time for people coming up to retirement. For anyone looking to turn their pension into an income by buying an annuity, the rates have been poor and falling almost every month.
At the start of 2009, £100,000 of pension would have bought a 65-yearold man an income of around £7,200 a year for the rest of his life. Today, it would buy an income of just £6,200 – more than £1,000 less every year.
Shopping around for the best annuity
For those lucky enough to make it to 65, average life expectancy for a man is another 18 years, and for a woman another 20 years. So a 65-year-old man with £100,000 in his pension pot who retired today, and lived to his average life expectancy of 83, would end up £18,000 worse off in retirement than someone with the same pot who retired four years earlier.
So, it’s not hard to see why shopping around for the best annuity deal is crucial when you finally cash in your pension fund. It’s a one-off transaction, and once you’ve signed the paperwork, you’re locked into a predetermined level of income for the rest of your life, with no opportunity to renegotiate.
Yet, in spite of this, more than 50% of people still don’t shop around – simply buying an annuity from their existing pension provider, which is unlikely to offer them a competitive deal. This has been a gift to insurers, who continue to offer rockbottom annuity rates to customers, and yet still pick up bucket loads of business. And though various attempts have been made to tell people they could miss out on thousands of pounds by not shopping around, the message doesn’t seem to be getting through.
One small step to a better retirement?
In February, the insurance industry trade body – the Association of British Insurers (ABI) – announced its latest attempt to improve the situation for retirees by introducing a new mandatory code of conduct for all its members that offer annuities.
From now on, when pension companies write to people in the run up to retirement, they won’t be able to include an application form for an annuity. They’ll also need to write to them several times, and be more explicit than ever before about the benefits of shopping around – including explaining that it’s possible to get more income if you have any chronic health conditions or if you smoke.
But while this feels like another step in the right direction, it’s unlikely to be the catalyst that gets every retiree to shop around and, preferably, seek advice to ensure they’re making the right decision. Even before the new code came into force, most insurers already included some detail about how customers may find a better deal elsewhere, but this wasn’t enough to change behaviour.
Although the ABI’s new code stipulates that insurers must ‘clearly and prominently’ state that their customers could get a higher rate elsewhere – such terminology is open to interpretation, and may allow companies to get away with not being explicit enough.
A change in behaviour is needed
If regulators are serious about helping you shop around, pension providers’ letters should include illustrations of the rates customers can get elsewhere, and encourage you to get advice from an annuity specialist. We also want to see all annuity providers forced to publish their rates and data showing how many of their existing customers buy an annuity elsewhere.
Once again, the powerful insurance lobby has stalled the onset of a necessary, more radical solution. My fear is that the latest tinkering won’t spark the mass change in behaviour needed.